Segundo estadio: PREOPERACIONAL

power. This will enable one to be assured of the stability of the estimates in terms of their sensitivity to changes in the size of the model even outside the given sample data, whose ‘average’ variation it represents.

A particular way of establishing the forecasting power of a model is to use the estimates of the model for a period not included in the sample. The estimated value (forecast value) s compared with the actual (realised) magnitude of the relevant

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dependent variable. Another way of establishing the stability of the estimates and the performance of the model outside the sample of data from which it has been estimated is to re-estimate the function with an expanded sample that is a sample including additional observations.

SELF ASSESSMENT EXERCISE

Describe the stages of econometric research

3.5 Concept of Model: Economic Model and Econometric Model

A model is a simplified representation of a real world process. That is a prototype of reality, and so describes the way in which variables are interrelated (Akerele, 2002).

These models exhibit the power of deductive reasoning in drawing conclusions relevant to economic policy.

Economic model describes the way in which economic variables are interrelated. Such model is built from various relationships between the given variables.

Econometric model on the other hand, consists of a system of equations which relate observable variables and unobservable random variables using a set of assumptions about the statistical properties of the random variables. In this respect, econometric model is built on the basis of economic theory.

Econometric model differs from econometric model in the following ways:

i. For an econometric model, its parameter can be estimated using appropriate econometric techniques.

ii. In formulation econometric model, it is usually necessary to decide the variables to be included or not. Thus, the variables here are selective, depending on the available statistical data.

iii. Because of the specific nature of econometric model, it allows fitting-in line of best fit, and this is not possible with economic model.

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iv. The formulation of an econometric model involves the introduction of a random disturbance term. This will enable random element that are not accounted for to be taken care of.

The “goodness” of an econometric model is judged on the basis of the following various properties:

i. Conformity with economic theory. A good model should agree with the postulate of economic theory. It should describe precisely the economic phenomena to which it relates.

ii. Accuracy- the estimate of the coefficients should be accurate. They should approximate as best as possible the true parameter of the structural model.

iii. The model should possess explanatory ability. That is, it should be able to explain the observations of the real world.

iv. The model should be able to correctly predict future values of the dependent variable.

v. The mathematical form of the model should be simple with fewer equations.

Such model should represent economic relationships with maximum simplicity.

vi. The equations of the model should be easily identified, that is, it most have a unique mathematical form.

SELF ASSESSMENT EXERCISE

Differentiate between an economic model and an econometric model.

4.0 CONCLUSION

We can see that this course would equip students understand the need to measure economic phenomena based on the application of statistic, mathematics and economic theory. This would help in achieving the goals of econometrics which include: analysis i.e. testing of economic theory, policy making, i.e. supplying

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numerical estimates of the economic relationships, which may be then used for decision-making, and forecasting, i.e. using numerical estimates of the coefficients in order to forecast the future values of economic magnitudes.

SEFL ASSESSMENT EXERCISE 4

Discuss the methodology of econometric research.

5.0 SUMMARY

This unit has discussed the meaning of econometrics which involves the integration of economics, mathematics and statistics for the purpose of providing numerical values for the parameters of economic relationships and verifying economic theories. The unit further elaborated the scope of econometrics which involves theoretical and applied econometrics and highlighted the goals of econometrics (analysis, policy-making and forecasting). The unit concluded with the methodology/stages of econometrics which include model specification, model estimation, model evaluation and evaluation of the forecasting validity of the model.

6.0 TUTORED-MARKED ASSIGNMENT

1. How do you perceive the roles of econometrics in analysis, decision/policy making and forecasting of economic phenomena?

2. Enumerate and explain the stages of econometric research you know.

7.0 REFERENCES/FURTHER READINDS

Akerele, A.A. (2002). Operations Research. Dimis Publications, Jos.

Allen, R.G.D. (1956). Mathematical Economics, Macmillan, London.

Brooks, C. (2008). Introductory Econometrics for Finance (Second Edition).

Campbridge University Press, United Kingdom.

Klein, L.R. (1962). An Introduction to Econometrics, Prentice-Hall International, London, pp. 64–6 6, 86-87, 104-105.

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Goldberger, A.S. (1964). Econometric Theory. Wiley, New York, P. 1.

Gujarati, D.N. (2006). Essentials of Econometrics (Third Edition). McGraw-Hill, New York. P. 1.

Koutsoyannis, A. (1977). Theory of Econometrics (Second Edition). PALGRAVE.

New York.

Samuelson, P.A., Koopmans, T.C. & Stone, J.R.N. (1954). Report of the Evaluative Committee on Econometrica, Econometrica, Vol. 22, No. 2, PP. 141-146.

UNIT 2: SIMPLE REGRESSION MODEL